February 7, 2014

State authorities in Florida on Thursday announced criminal charges targeting three men who allegedly ran illegal businesses moving large amounts of cash in and out of the Bitcoin virtual currency. Experts say this is likely the first case in which Bitcoin vendors have been prosecuted under state anti-money laundering laws, and that prosecutions like these could shut down one of the last remaining avenues for purchasing Bitcoins anonymously.

michaelhackfeedbackWorking in conjunction with the Miami Beach Police Department and the Miami-Dade State Attorney’s office, undercover officers and agents from the U.S. Secret Service’s Miami Electronic Crimes Task Force contacted several individuals who were facilitating high-dollar transactions via localbitcoins.com, a site that helps match buyers and sellers of the virtual currency so that transactions can be completed face-to-face.

One of those contacted was a localbitcoins.com user nicknamed “Michelhack.” According to this user’s profile, Michelhack has at least 100 confirmed trades in the past six months involving more than 150 Bitcoins (more than $110,000 in today’s value), and a 99 percent positive “feedback” score on the marketplace. The undercover agent and Michelhack allegedly arranged a face-to-face meeting and exchanged a single Bitcoin for $1,000, a price that investigators say included an almost 17 percent conversion fee.

According to court documents, the agent told Michelhack that he wanted to use the Bitcoins to purchase stolen credit cards online. After that trust-building transaction, Michelhack allegedly agreed to handle a much larger deal: Converting $30,000 in cash into Bitcoins.

Investigators had little trouble tying that Michelhack identity to 30-year-old Michell Abner Espinoza of Miami Beach. Espinoza was arrested yesterday when he met with undercover investigators to finalize the transaction. Espinoza is charged with felony violations of Florida’s law against unlicensed money transmitters — which prohibits “currency or payment instruments exceeding $300 but less than $20,000 in any 12-month period” — and Florida’s anti-money laundering statutes, which prohibit the trade or business in currency of more than $10,000.

Police also conducted a search warrant on his residence with an order to seize computer systems and digital media. Also arrested Thursday and charged with violating both Florida laws is Pascal Reid, 29, a Canadian citizen who was living in Miramar, Fla. Allegedly operating as proy33 on localbitcoins.com, Reid was arrested while meeting with an undercover agent to finalize a deal to sell $30,000 worth of Bitcoins.

Documents obtained from the Florida state court system show that investigators believe Reid had 403 Bitcoins in his on-phone Bitcoin wallet alone — which at the time was the equivalent of approximately USD $316,000. Those same documents show that the undercover agent told Reid he wanted to use the Bitcoins to buy credit cards stolen in the Target breach.

Nicholas Weaver, a researcher at the International Computer Science Institute (ICSI) and at the University of California, Berkeley and keen follower of Bitcoin-related news, said he is unaware of another case in which state law has been used against a Bitcoin vendor. According to Weaver, the Florida case is significant because localbitcoins.com is among the last remaining places that Americans can use to purchase Bitcoins anonymously.

“The biggest problem that Bitcoin faces is actually self-imposed, because it’s always hard to buy Bitcoins,” Weaver said. “The reason is that Bitcoin transactions are irreversible, and therefore any purchase of Bitcoins must be made with something irreversible — namely cash. And that means you either have to wait several days for the wire transfer or bank transfer to go through, or if you want to buy them quickly you pay with cash through a site like localbitcoins.com.”

One very popular method of quickly purchasing Bitcoins — BitInstant — was shuttered last year. Last month, BitInstant CEO Charlie Shrem was arrested for money laundering, following allegations that he helped a man in Florida convert more than a million dollars in Bitcoins for use on the online drug bazaar Silk Road.

It’s still unclear how the defendants Espinoza and Reid were able to obtain so many Bitcoins for sale, although a review of Michelhack’s profile suggests little more than arbitrage — that is, buying Bitcoins for $700 apiece and selling them for a couple hundred dollars more.

Weaver said he anticipates that more states will soon seek to crack down on high-dollar Bitcoin sellers on localbitcoins.com. “I’d expect many more state cases like this one because it will act to strangle the lifeblood of the online dark markets,” such as Silk Road, Weaver said. “If you want a significant amount of anonymous Bitcoins, right now this community is about the only mechanism still available.”

News of the Florida actions comes on the heels of the arraignment of Ross Ulbricht — the alleged onetime owner of the Silk Road. Ulbricht was scheduled to be arraigned in New York today.

The court documents in this case also offer a great example of the traceability of Bitcoin transactions — a potential danger for both those seeking anonymous payments and for law enforcement officials posing as criminals as part of an undercover investigation. The ICSI’s Weaver noted that, by examining the times and transactions in the criminal complaint, it appears that this is the Bitcoin wallet associated with the undercover officer.

131 thoughts on “Florida Targets High-Dollar Bitcoin Exchangers

  1. Solar-Powered-Sea-Slug

    So if the only real crime here was the fact that during the transaction, the seller mentioned to the buyer, that he was going to use the product for some “allegedly” illegal purpose, then wouldn’t the solution be to use a deaf person to make the transaction?

    Or someone who speaks a different language?

    Don’t get me wrong, I am all in support of anti-laundering laws, I just don’t understand how the sellers got arrested.

    If I mention to the Spanish speaking clerk at my local Walmat that I am going to kill my spouse with the knife I am buying…she can be held accountable for that?

    What if I buy $42k worth of gold, (http://www.apmex.com/category/1160/kilo-gold-bars-only) and mumble that I will use this to purchase stolen blah blah blahs…the person or company who sold me the gold is now responsible?

    I really don’t see this holding up in a court, or an appeal.

    1. Carl Mullan

      No I’m sorry you are incorrect. Those individuals or businesses that exchange national currency for digital currency (Bitcoin) are considered Money Transmitters/MSBs and thus financial institutions. In America they are required to register with FinCEN, abide by the Federal laws and be registered in the state they are transacting in. This is a regulated financial transaction and anyone engaged in this business and not properly licensed and registered can be charged. What? You did not follow the Mt Gox case? The localbitcoiners who go each week buying and selling are technically breaking both state and federal law because the threshold for Bitcoin transactions is zero $0. Like it or not….understand it or not….that’s the law.

      1. saucymugwump

        Well put.

        There’s all sorts of great stuff in that PDF, including:
        – All MSBs “are subject to examination for BSA compliance by the Internal Revenue Service.
        – “To permit foreign-located persons to engage in MSB activities within the United States and not subject such persons to the BSA would be unfair to MSBs physically located in the United States and would also undermine FinCEN’s efforts to protect the U.S. financial system from abuse.”
        – “Each foreign-located person doing business, whether or not on a regular basis or as an organized or licensed business concern, in the United States as a money services business shall designate the name and address of a person who resides in the United States and is authorized, and has agreed, to be an agent to accept service of legal process with respect to compliance with this chapter, and shall identify the address of the location within the United States for records pertaining to paragraph” blah, blah.

        And armored car services are not legally “money transmitters” because, even though they transmit money, they have no financial stake in the transaction.

      2. Solar-Powered-Sea-Slug

        “the threshold for Bitcoin transactions is zero”

        So you are stating that it is 100% illegal, as defined by US Law, to be a US Citizen and to buy a single Bitcoin? Period?

        I can’t find any other references to that fact. I understand the reference to being a MSB. But I see no other documentation that states if I personally sell a Bitcoin to my friend, I have broken the law.

        Can someone point me to a documented, published reference that states: “It is illegal to purchase Bitcoins in the United States”.

        It is my understanding, that the IRS does not have any direction on how to even tax Bitcoin transactions yet. But nowhere does it state that it is illegal to own, trade, sell or purchase.

        I am not trying to be argumentative, I want to see a legally published reference that states it is illegal to purchase Bitcoins in the US.

      3. Paul Robinson

        @voksalna “No I’m sorry you are incorrect. Those individuals or businesses that exchange national currency for digital currency (Bitcoin) are considered Money Transmitters/MSBs and thus financial institutions. In America they are required to register with FinCEN, abide by the Federal laws and be registered in the state they are transacting in.”

        I would argue that under the statutory definition, Bitcoin is not a “currency” any more than Confederate money is any longer a currency, since they are not commonly accepted. Government agencies routinely overreach and charge people with crimes even if the statute is badly written, doesn’t apply or is inapplicable, because a lot of people will plea out because either they can’t afford to fight, can’t take the risk if they fight that they’ll be convicted, or the government imposes ‘civil forfeiture’ or freezes their assets so they can’t raise the money to fight.

        It took years and a number of high-profile arrests and trials to establish something that should have been a no-brainer from the start, that it’s not illegal to film police in a public place because it is a First Amendment right. One guy would have been subject to several years in prison under the two-party rule because he had his cell phone out and was videorecording an encounter with police. They tried to claim this violates the audiotaping rule requiring all-party consent, normally used to cover telephone calls.

        1. voksalna

          You addressed that to the wrong person. I am not Carl Mulan.

        2. Carl Mullan

          As of May 2008, the Judge said that “currency” is pretty much a general term for “value” transmitted online and that it did not have to be a recognized legal tender currency to still be covered by the money transmitting law. Please see the Memorandum Opinion filed in response to the Defendants Motion to Dismiss Counts Two, Three and Four of the indictment (e-gold) http://www.gpo.gov/fdsys/pkg/USCOURTS-dcd-1_07-cr-00109/pdf/USCOURTS-dcd-1_07-cr-00109-1.pdf After this point in time, all digital currency systems fall under 1960, this includes Bitcoin and decentralize systems.

      4. Judge

        I am confused, in March 18, 2013 FinCen, clearly stated that “A user who obtains convertible virtual currency and uses it to purchase real or virtual goods or services is not an MSB under FinCEN’s regulations.8 Such activity, in and of itself, does not fit within the definition of “money transmission services” and therefore is not subject to FinCEN’s registration, reporting, and recordkeeping regulations for MSBs.” So what law is broken?


        1. voksalna

          It is sneaky law change and how they took MtGox money. Currency is not considered a ‘good’ so they are saying he is ‘converting’ which is considered some form of money laundering. Would be same if he bought a lot of things in bulk and then sold those for money (profit or not) as planned. These are all loop holes to prevent a person who accepts a bitcoin for a cup of coffee or a mobile phone or a VPS from being called a money transmitter but as soon as any money is involved it is magic! Poof! Money transmitter even though there is no ‘currency’ for ‘currency’ exchanged since technically BitCoin is at best a good but in reality nothing but a hash that was generated from nothing — so not really even a good; something like a ‘chit’.

          They are wanting to have a slice of cake but also to eat it at FinCEN. And they do not want BitCoin to go away because it is NOT anonymous. Once it is converted to cash though that cash DOES become anonymous (and vice-versa). Then they use things like PATRIOT ACT and KYC ‘laws’ passed after the 9/11 to make any sort of ‘off the book’ exchange illegal unless it is recorded.

  2. HodgeyBoy

    “…the IRS does not have any direction on how to even tax Bitcoin transactions yet…”

    That’s the bottom line right there. The bottom line is:

    Don’t f*@k with our money!

  3. Lis

    This is a joke. There is a lot of things that not match in this case. This guy was just buying Bitcoins a low price to sell it a better high price. The police in Miami Beach create falses cases and I know it because it happened to me, they lie in a case with another person that I know and they put me false charges because I didn’t want to help them to lie. I know Michell and I know he didn’t nothing wrong. Please help with likes or share this page, people need to know the true. The Miami Beach police is a joke, a wich hunt against Bitcoin users: https://www.facebook.com/bitcoindefenders

  4. Paul Robinson

    You’re not supposed to complete a transaction if you have knowledge that the funds came from an illegal source; this is one way you can be entrapped. If you are a car dealer or salesman and the seller jokes at you he sold coke or meth or committed murders or robbed houses to get the money to buy it, you would have to ask him if he’s kidding and if he says no, you have to refuse the sale and probably toss him out. Or you can be arrested for accepting funds you know are the proceeds of crime. If someone pays their defense lawyer with money they admit came from a drug deal you can’t defend them. I think this is what ‘money laundering’ is. (See also what Joey Pantolino had to do after an (intentional) “I just shot Marvin in the head” incident in the movie ‘Bound’ 🙂 )

    1. voksalna

      There is no evidence that the funds came from an illegal source. Equally, there is no evidence that the bitcoins were acquired at all illegally. Again, equally, there was also no evidence that the bitcoins if they had been purchased would have been spent on anything illegal, that the funds that were received for the bitcoins would have been spent on anything illegal, and moreover there was no possible way for the bitcoins to have been spent on ‘illegal credit cards’ because the guy was an undercover operative.

      While I understand according to some freak of US law you can be a conspiracy of one, there was no conspiracy going on. If, however, the table was reversed and the person who had the money was the person who had the bitcoins in this case, and he approached the law officer saying he was using it to purchase stolen credit cards, that may have been an actual case (however dubious, according to your laws, this can still be considered a ‘conspiracy’ despite no actual crime having ever taken place).

      1. Paul Robinson

        @voksalna “The possession of a bitcoin is not a crime. The possession of cash is not a crime. If neither of these is a crime, then this can not be a crime absent some sort of export law or customs issue.”

        “Having [consensual] sex with someone is legal. Selling services is legal. But selling [consensual] sex services is not legal.” – George Carlin

        1. voksalna

          Disingenuous to suggest, even as a joke, that a good and a service are the same thing. Never mind that these are the sorts of laws that date to times of increased moralism-as-law and vary from place to place as most ‘morality’ based and generally victimless crimes do.

      2. Paul Robinson

        @voksalna “While I understand according to some freak of US law you can be a conspiracy of one, there was no conspiracy going on.”

        Doesn’t have to be a conspiracy. In many cases attempting the crime or agreeing to commit the crime is an offense. If you hire someone to kill your wife or girlfriend that’s attempted murder even if they don’t do it. Even if you change your mind and call it off I think it might still be chargeable.

        This is all-new territory and case law probably hasn’t been made on the subject yet.

        A number of butchers got convicted over the years for selling meat marked as ‘kosher’ when it wasn’t because it hadn’t been inspected by a rabbi. This continued until some bright lawyer realized how it was possible to fight the law. Requiring meat to have rabinical inspection is an establishment of religion – the Jewish religion – and thus violates the First Amendment! And you know what, the courts – correctly in my opinion – bought the argument and struck down laws that made it illegal to sell meat marked as kosher but not inspected by a rabbi.

        1. voksalna

          He had no mens rea. There was no actus reus. He was not guilty of anything involving a conspiracy. And again you are confusing a good and a service. I should become US lawyer.

          To put in simpler terms:

          1. Paul Robinson

            @coksalna “He had no mens rea. There was no actus reus. He was not guilty of anything involving a conspiracy. And again you are confusing a good and a service. I should become US lawyer.”

            I am not confusing them. But the point remains, it doesn’t require a conspiracy and some crimes have “strict liability” in which there need be no means rea, whether you were doing it knowing it was illegal or did it for criminal means or simply made a mistake, it’s automatically a crime. Having sex with someone underage is one of those, if you are beyond the age difference that they allow someone to have sex with someone under the age of consent (Romeo and Juliette laws), you’ve committed a felony because the person underage cannot consent to sex, and it doesn’t matter whether you knew or not or even if they lied to you and told you they were older, if you had sex with them you’re automatically liable even if it was innocent error on your part or the result of their lying about their age. I think the only way you can get out of it is if you actually carded them and they knowingly showed you a fake ID and even then that might not be enough. Some criminal laws require no mens rea and carry strict liability.

  5. Paul Robinson

    Consider the following. This 16-year-old boy meets a 16-year-old girl, and the two of them hit it off so well they decide to become a couple and start coupling (in bed). Nothing wrong here, and in 30 states and the District of Columbia it’s legal to have sex with someone who is at least 16 and even in all but 3 (California, Arizona and Wisconsin) even though it’s below the age of consent it falls under what is called the ‘Romeo and Juliette’ exemption for consensual acts where one or both is under the age of consent but very close in age. And even in those 3 states it’s only a misdemeanor if you’re close in age to have sex with someone who’s under age.

    So the sex is either legal or excepted by the Romeo and Juliette laws or is just a misdemeanor in 3 of them. But, if they record themselves having sex, making that film can be considered the felony crime of ‘production of child pornography’ since it’s illegal to record any person under the 18 having sex. Some judges have realized how stupid it is to criminalize stupid behavior (like kids taping themselves having sex) and thrown out charges, but at least one appeals court upheld the child pornography conviction of a boy and girl who were under 18 for creating a recording of their (legal) sex act because the law is supposed to protect minors from exploitation.

  6. Paul Robinson

    These people have not learned something Professor James Duane told us – confirmed by a detective from the Virginia Beach (VA) police that Duane was 100% correct – that you should never say anything to the police or any investigator.

    Watch the 45 minute video, where the cop gets 1/2 of the time and the first thing he said was that Duane was right on every single point.


    Don’t say anything and always ask for a lawyer. The police / federal investigators are not on your side and are only interested in jailing people and getting convictions.

  7. Paul Robinson

    So, how you get around the issue is, you can also sell precious metals, say gold, or silver. As long as the customer can take possession of actual gold or silver if they want it, you’re not a money transmitter. So, if you take payment for the user to fund their account, and you credit them with whatever the current spot price is for gold or silver, then give them the option to either take delivery of the gold or silver, leave it in your vault (and charge them a storage fee), or sell gold or silver, and take a refund however they want it (in dollars or anything else, such as Bitcoins) you are not a money transmitter. As long as they can make a bona fide purchase of something other than an alternate currency, you are not a money transmitter. It’s those who do a direct conversion from cash into Bitcoins that are considered money transmitters.

    1. Paul Robinson

      Another way is to sell something, whatever it is, in U.S. dollars, ship it to them, and refund the difference in whatever you normally accept. If you accept Bitcoins as payment for whatever you sell, but will accept U.S. dollars but refund the change in Bitcoins, you’re also not a money transmitter. This is done all the time in U.S. stores that accept Canadian currency (and Canadian ones that accept U.S. currency), they’ll take the Foreign Currency at the current spot rate, but you get change in the local currency. So if I’m in a Canadian supermarket, and the price is CDN$1.75 (and I give the guy a USD$100), I’ll get back about CDN$95). If I’m in a U.S. supermarket, and the price of an item is $1.75 (and I give the guy a CDN$100), I’ll get back about USD$102. Since it’s an actual sale of something other than currency, the store is not a money transmitter.

      1. voksalna

        Do this too many times and you would probably get arrested for legal definition of ‘money laundering’ because technically according to legal definitions as present at least in US, that is indeed money laundering. It is also how the vast majority of counterfeit bills are ‘laundered’ out to the world (minus the exchange — or not) after being bought in ‘bulk’.

        I do not think you understand things but I do not mind explaining because it is dangerous to think you can find ‘loop holes’ around things that governments will find ‘loop holes’ to prevent and suggest these as options to other people. I think you may have committed crime of encouraging criminal activity — but no, because no mens rea (maybe?). 😉

        1. Paul Robinson

          @volksalna “I think you may have committed crime of encouraging criminal activity — but no, because no mens rea (maybe?).”

          No, because of First Amendment issues. I’m not encouraging anything, I am simply expressing my opiniion. The law says “bona fide” purchase, so if you buy or sell things (that are not in and of themselves illegal) or services, and you accept funds for it, again, you’re not money laundering as long as the thing you’re selling isn’t itself illegal. Doesn’t matter whether it’s bulk sales, if you sell someone 50 cases of toilet paper that’s clearly a bulk sale but it’s not illegal and accepting money for it – even if you give change – doesn’t change a sale of goods into money laundering. The best argument to make to fight this sort of charge, if you weren’t engaged in sales of something is that Bitcoins are not a form of currency because they are not generally accepted as currency. They are not issued by a bank or government and you can’t trade them at any bank and nobody that is licensed as a money transmitter accepts them as currency. I’m a notary public and charge $2 for a single document. So if someone had twenty documents and offered me a 1 TB hard drive in exchange, that’s a barter transaction, and if I take it, I am not a money transmitter because hard drives are not money nor currency. If anything, it should be arguable that Bitcoins are simply data, not currency, since they do not function as currency. What banks accept them? What governments will redeem them?

    2. voksalna

      You must be new here.

      I guess you have not heard of E-Gold debacle or others who tried to do same. hxxp://en.wikipedia.org/wiki/E-gold#Changing_definition_of_a_money_transmitter

  8. Alert

    The federal reserve gets a guaranteed 6% interest on their money with very, very little oversight. In 2008, they returned to the treasury more money than they had in the previous 17 years combined. I wonder where all the money went. The federal reserves are applying pressure on the government and the government is applying pressure to common businesses and common people.

    It’s the 1% who will either control the coins, or squash the coins. The only way to change things is to weaken their position.

  9. Kuchuk

    Unfortunately, common sense and logic have no place in the US justice system of today. Might makes right is the new motto. Since 9/11 we are guilty until proven innocent, jailed without charges, and for some sex crimes you are detained for life even though your sentence has been served. Freedom, liberty, privacy and habeas corpus are ideals of the past.

    Legal protesters have no protection from Police, hidden behind anonymous riot gear with no means of identifying the individual officers. It is an open invitation for the police to abuse the public because they know they cannot be identified. Much like the military in Iraq and Afghanistan that put hoods on the detainees.

    My country has become a police state and is fast approaching the nightmare that we thought Russia was under Stalin in the 50’s.

    Just watch the TV show “cops” to see police here behaving badly with no justification. They do it because they can and they have the guns.

  10. voksalna

    Brian, I’m not sure why my (I believe single) reply to Paul Robinson didn’t even post as pending today but if it’s in the queue and just not showing here, can you check?

    I have another question that’s unrelated to the commenting system but that’s been in the back of my mind for some time now that you might be able to explain: In the case of seizure of items of variable value (for instance SilkRoad BTC, or these BTC, or anything of this sort) how are gains and losses calculated?

    And since things at least optimally should be released if they’ve been seized and a person’s been found innocent (not that they often are released, unfortunately; forfeiture law confounds me there) is there any recourse for a defendant who has not been found guilty who has found their 1000$ USD per BTC wallet seized on day of warrant released after being found not guilty and having their BTC be worth 1/4 as much? It seems this should not even be seen like a stock value or a forex value given the variability and market demand issues and fact that they neither represent a physical good nor a convertible currency without the use of a broker.

    What recourse does a person have in such a case?

    If a wallet is stolen it can be argued that the wallet would be calculated based on the market value at the time of the theft, but given these wallets appear to be seen as something to be ‘auctioned off’ by law enforcement, how do you (and your sources) perceive this as being treated in the future from a victim and value standpoint?

  11. voksalna

    Is there some reason neither of my (two) posts today have not posted? Database problem? This is a test.

    1. BrianKrebs Post author

      Sorry, Voksalna, I don’t have any pending or wayward comments from you that I can find anywhere. I seem to be getting other comments just fine today.

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